Leandro's avatar
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Management matters
Third post on the book "Capital returns". It's an important topic this time: "Management Matters."

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Thoughts are my own, photos are from the book, and tweets don't follow any particular order.

Let's begin!

Capital allocation is probably the most important task of any manager.

The decisions management makes allocating capital today will have important long term implications. This is why they should always be the focus for any investor:

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When you buy shares in a company, you give management your confidence to allocate your money. Would you randomly give your money to a stranger who you don't trust? Highly doubt it.

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ST oriented investors should not look too much into allocation as it will not move the stock.

To allocate capital efficiently a manager must be contra-cyclical, and to be contra-cyclical, they must understand very well the capital cycle of its industry.

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Being counter-cyclical seems obvious, yet many managers end up exhibiting herd-like behavior

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However, this herd behavior is exhibited with shareholder's money, but not with their own:

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Long term orientation is also key to allocate capital efficiently, and incentives play a very important role in this.

If a manager is paid based on EPS, they'll most likely focus on boosting this metric over the ST rather than thinking on what moves a stock over the LT.

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If focus is on EPS, management might fail to make the right decision for the long term as this would impact their salary

Focusing on metrics such as TSR is better as managers focus on what creates value over the LT.

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When managers behave pro-cyclically, they establish a drag on long term returns.

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So, great traits for any manager:

(a) Understand the capital cycle
(b) Allocate capital in a counter-cyclical way
(c) Not afraid to reduce the size of the company if it makes sense

Currently researching a company that does all three

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Managers also need stability to be able to transform these traits into value creation

Scandinavian companies typically had high insider ownerships which allowed them to compete favorably vs peers

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High insider ownership can also come in the form of family owned businesses, which typically outperform.

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A great manager must be given the tools to make LT decisions without thinking on short term implications.

A great management team is also responsible for establishing a strong culture so operational excellence is endured when they leave.

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Culture can be a strong competitive advantage.

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Hope you enjoyed this post and helped you think about the importance of management!
Joey Hirendernath's avatar
Wow, this is super informative, thanks for diving into this topic Leandro.

Some great points highlighted in relation to management . One follow up question I have - what would you say are the some characteristics of a strong culture ? Would you say it is quite a subjective test ?
Leandro's avatar
@joeyhirendernath quite subjective because one culture can work in one place but not in another
Joshua Simka's avatar
@invesquotes I also think the portion about enduring culture that persists after the departure of the people who helped establish the culture would be tricky to test. My instinct, having experienced a few top leadership changes so far in my professional life at big orgs, says that this is probably rare!
Rihard Jarc's avatar
One of the best management allocators to date was Zuckerberg, yet people still doubt him.

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